[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Wrap-Up
ACCOUNTANTS’ VERSUS ECONOMISTS’
PROFITS
Accounting profits:
Economic profits:
revenues minus expenditures
revenues minus rents minus economic costs (including
opportunity costs of labor and capital)
The Theory of the
Competitive Firm
We now have completed half of our description of the theory of the competitive firm.
The firm takes as given the prices it pays for the inputs it uses, including the wages
it pays workers and the costs of capital goods. From these figures, it can calculate
the costs of producing different levels of output. Taking the prices it receives for
the goods it sells as given, the firm chooses the level of output to maximize its profits—that
is, it sets price equal to marginal cost. From this information, we can derive
the supply curves that were used in Chapters 3 and 4. As prices increase, output
increases; firms produce more, and more firms produce. Thus, supply curves are
upward sloping.
But as the firm produces more, it will also demand more labor and more capital.
Deriving firms’ demand curves for labor and capital is our next task, which we take
up in the following chapters.
THE THEORY OF THE COMPETITIVE FIRM ∂ 171